Crisis, Protectionism, and Doha—What Future for the WTO?

The financial crisis underscored the importance of the World Trade Organization in warding off protectionism, but as the WTO is increasingly bypassed in trade reform, questions arise about its role in world trade.

While the World Trade Organization (WTO) still holds its position as the guardian of stability and predictability in world trade, it has failed to fulfill its promise as a source of new rules and further liberalization. The WTO must adopt a more flexible approach to trade negotiations, move beyond the single undertaking/universal consensus requirements, and find ways to leverage opportunities where liberalization is already taking place.

Steve Charnovitz of the George Washington University Law School, Gary Hufbauer and Arvind Subramanian of the Peterson Institute of International Economics, and Carnegie’s Uri Dadush—author of a new policy brief on the subject—discussed the importance and limitations of the WTO, proposed ideas for reform and addressed questions on the future of the WTO and Doha at an event moderated by Paul Blustein of the Brookings Institution.

WTO Remains Relevant

Participants agreed that the WTO continues to play a central role in the international trade regime.

Dadush noted that, since its inception in 1995, the WTO has been the guardian of world trade, as well as an essential plank of globalization. To date, 370 disputes have been filed in its dispute settlement system, with 80 decided by the appellate court and the rest settled out of court; compliance has been good overall.

Dadush also pointed to China’s accession to the WTO as a particular success, given that the country used its entrance to anchor far-reaching domestic reforms. 24 other countries have also joined the organization.

Hufbauer suggested that countries’ own desire to restrain policies to fit WTO regulations before disputes arise may be an even stronger indication of the organization’s success. As Charnovitz noted, Congress specifically left out a discriminatory clause in the Cash for Clunkers program to ensure WTO compliance.

Subramanian highlighted the WTO’s democratic governance structure, which evolves endogenously and is unique among international institutions.

Reform Needed

Even as panelists noted that trade has increased significantly since 1995, when the WTO was established, they pointed to the WTO’s limited involvement in the rise, citing inefficacies in its settlement system, asymmetry in its application of rules, and the increasing complexity of the issues it addresses, as well as its mechanism for negotiating multilateral deals, as main causes. A Doha deal, though diluted, is unlikely to be concluded before 2011, if at all.

Dadush noted that unilateral, bilateral, and regional processes are increasingly bypassing the WTO in trade reform . While trade has consistently increased at 2–3 times the rate of GDP since the WTO’s founding, multilateral negotiations since the Uruguay Round have not accounted for any of the change; instead, autonomous and regional processes have largely determined liberalization. A World Bank study concluded that 65 percent of reductions in applied tariffs on trade in goods since 1995 is attributable to autonomous liberalization, 10 percent to regional processes, and 25 percent to implementation of the Uruguay Round provisions.

While the WTO’s settlement system has been largely successful, compliance remains a problem. Charnovitz noted that the United States is the biggest non-complier.Blustein critiqued the system’s lack of retroactivity, stating that it decreases incentives for countries to use the settlement system.

The WTO’s inclusion of countries has been impressive, but the range of members makes consistency in regulations difficult. Dadush noted that the WTO’s large, diverse group of members poses a significant challenge to decision-making. Charnovitz agreed, highlighting the fact that laws in new countries vary significantly from those in incumbent countries. The Single Undertaking and Consensus rules only exacerbate the problem.

One participant noted that the current classification of least developed countries (LDC), and the supposedly preferential treatment that accompanies it, is highly problematic, particularly for Africa. Because many relatively poor countries are not considered LDCs, economic integration in the region is made more difficult.

The issues facing the WTO are becoming increasingly difficult; making reform all the more necessary if the organization is to remain effective. During the Uruguay Round, WTO members chose to defer discussion of the harder issues; we are seeing the fallout from that decision now. Furthermore, the current climate is particularly unfavorable to liberalization, with government regulation and subsidies on the rise.

As decisions gets harder, agreements are growing increasingly diluted, and the costs of engaging in WTO negotiations increasingly outweigh the benefits. Dadush noted that private sector interest in the WTO is falling as a result.

WTO’s Future

Participants agreed that the time for a new WTO approach to negotiations has come. The WTO must adopt a more flexible approach, move beyond its exclusive Doha/universal agreement model, and engage the business community in its negotiations.

Dadush started off with a relatively mainstream proposal, suggesting that countries engage in pluritateral agreements on individual issues, following—for example—the process used for the Government Procurement agreement.

To prevent countries who don’t enter into these agreements from feeling excluded, Dadush proposed that these agreements deal with linked issues (rather than only one), allow the same privileges to but require lesser or no concessions from non-members, and give preferential treatment to the poorest countries.

Charnovitz and Hufbauer supported this proposal, with Charnovitz further recommending that, if countries find it impossible to come to a consensus as required within the WTO, they should move outside of the forum to negotiate—for example, on the trade aspects of climate change.

Noting the popularity of regional trade agreements (RTA), and the fact that some have been successful, Dadush argued that the WTO should find a way harness their energy.

Dadush cited research showing that some RTAs increase the welfare of member countries significantly and appear to have little negative effects on non-members. He pointed to the EU, as well as NAFTA, CAFTA, and the Pan-Arab FTA, as particular successes.

To build on the success of well-designed RTAs, the WTO should engage in what Dadush referred to as “opportunistic multilateralism” by strategically expand existing RTAs into other relevant areas.

Subramanian made a similar proposal, suggesting that countries take advantage of the WTO’s settlement system, but make agreements on their own and then bind them within the organization.

In addition, the WTO should assist member nations in designing their own trade reforms.

Because so much change arises from national policy, Dadush argued that this would have a large impact. Furthermore, the IMF and World Bank are already engaging in such activity, and the WTO is uniquely positioned to advise, given the quality of its Trade Policy review instrument.

Finally, voicing a sentiment that was echoed by the rest of the panel, Charnovitz called for the WTO to engage the International Union for Conservation of Nature (IUCN), the International Labor Organization (ILO), and particularly the business community in its negotiations if it expects to successfully innovate and legislate.

Doha’s Future

Participants did not agree on whether the Doha Round could be revived, or even if it is worth reviving.

The content of the Doha Round has become increasingly diluted, particularly when compared to what was envisaged during its 2001 launch, and the timetable has been pushed back once again. Dadush noted that this trend is likely to continue—he predicted that the round will move forward, but at the cost of further dilution, and will not be concluded until 2011 at the earliest.

Hufbauer disagreed, arguing that the only way for Doha to move forward is if new issues are brought to the table—not because the current agenda is too small, but because the benefits are unbalanced. Introducing a new agenda could help the round finally finish, but will require a dramatic rhetorical shift from the Obama administration.

Subramanian argued that debate should focus not on whether Doha will conclude, but rather whether it is even worth concluding. He noted that, in its current state, the round is overlooking many timely issues, from rising protectionism to engaging the business community to dealing with environmental regulations.

While the safeguard was most likely legal, and not at all likely to start a trade war, it was a damaging signal for the U.S. to send right before it is set to host a G20 summit, particularly because G20 members had vouched not to increase protectionism.

The issue is also being misrepresented to the public, according to Charnovitz. None of the justifications used by the administration, from the importance of enforcing agreements to the value of leveling the playing field, logically apply in this case.

Subramanian noted that such measures do not deal with the actual root of the problem—China’s exchange rate policy.

About the International Economics Program

The Carnegie International Economics Program monitors and analyzes short- and long-term trends in the global economy, including macroeconomic developments, trade, commodities, and capital flows, drawing out their policy implications. The current focus of the program is the global financial crisis and its related policy issues. The program also examines the ramifications of the rising weight of developing countries in the global economy among other areas of research.

Related Resources

The Program monitors and analyzes short- and long-term trends in the global economy, including macroeconomic developments, trade, commodities, and capital flows, and draws out policy implications. The initial focus of the Program will be the global financial crisis and the policy issues raised.

Drawing on the expertise of Carnegie's global centers, the Bulletin provides a candid view of the economic crisis and its political implications. Addressing the momentous challenges of the economic downturn will require objectivity, and the ability to analyze the political dimensions of reforms around the world.